Wall Street slipped on Thursday, following European markets, as the initial
euphoria over a fiscal cliff deal faded and attention turned to further
negotiations in coming months.

Early trading on Wall Street led US markets down, with the Dow Jones falling 0.3pc, while the Nasdaq and S&P 500 fell 0.2pc.

London's index of leading shares nudged higher after lunch, up 0.1pc to 6032.2 points, after falling 0.1pc in early trading on Thursday.

Other European markets, however, have continued their decline seen in early trading, with the CAC in Paris down 0.5pc at 2.45pm, the DAX in Frankfurt was down 0.3pc and the IBEX in Madrid was down 1pc.

In Asia the Hong Kong's Hang Seng Index rose marginally and hit a 19-month high before falling and ending the day up 0.4pc. Markets in Japan and mainland China were closed for extended holidays.

While Democrats and Republicans passed a compromise to avoid a so-called fiscal cliff of $600bn of tax rises and spending cuts, they only delayed the spending cuts for two months.

Investors fear another debilitating stand-off at the end of February. Just before the New Year, the US Treasury Secretary Tim Geithner indicated that the federal government would run up against the debt ceiling - a legal cap on its total borrowing set by Congress - by the end of February, which will need to be voted on again as it was in August 2011.

Paul Reilly at Clear Currency said: "While the vote averted immediate pain like tax hikes for almost all US households, it did nothing to resolve other political showdowns on the budget that loom in coming months.

"Congress must now act as early as mid-February to prevent a default and the dispute may reprise a similar 2011 episode that led to a downgrade of the U.S. credit rating."

The euro fell against the dollar in Asia as investor confidence gave way to concerns about future budgetary rows in Washington.

"Currency traders may be positioning themselves for the troubles that lie ahead for the US economy as Congress confronts spending cuts in two months' time," IG Markets said in a report.

"Investors realised that the fiscal problem is far from over as the debate on raising the debt ceiling looms... we expect an uglier showdown than the tax issue."

Oil prices also fell as caution returned to markets. Brent North Sea crude for February delivery shed 29 cents to $112.18.

"The market lost steam after the excessive buying of oil in reaction to the passing of the US fiscal cliff deal," Victor Shum, managing director of IHS Purvin and Gertz in Singapore told AFP.

"Some caution has returned to the market. After all, there are going to be more negotiations in the fiscal deal in the next two months."

Global financial markets soared yesterday after the US Congress backed a stop-gap agreement that averted across-the-board tax hikes and automatic spending cuts which some had feared could tip the economy back into recession.

On Wednesday the FTSE 100 closed up 2.2pc at 6,027.37, adding £32.8bn to the value of Britain's top companies.

The FTSE 100 breached the psychological 6000 level within two hours of the start of the first trading day of the new year, and Wednesday's rise was the biggest since the end of November, when it climbed 2.36pc.

The US agreement is seen as a step towards correcting the country's public finances which are showing a huge annual deficit and accumulated mountain of debt.

The bill would prevent an expiration of extended unemployment benefits for an estimated two million jobless, renew tax breaks for businesses and renewable energy purposes, block a 27pc cut in fees for doctors who treat elderly Medicare patients, stop a $900 pay increase for lawmakers from taking effect in March and head off a threatened spike in milk prices.

The bill would also raise the top tax rate on large estates to 40pc, from 35pc, and taxes on capital gains and dividends over $400,000 for individuals and $450,000 for couples would be taxed at 20pc, up from 15pc.

It would stop $24bn in spending cuts set to take effect over the next two months, although only about half of that total would be offset with spending reductions elsewhere in the budget.

Even with enactment of the legislation, taxes are on the rise for millions.

The higher taxes on the wealthy - which will deliver some $600bn in revenue over 10 years - are likely slow the economy a little bit.

But a bigger drag on the economy will come from a tax increase Democrats and Republicans didn't even bothering to fight over: the end of a 2 percentage point temporary cut in the Social Security payroll tax, originally enacted two years ago to stimulate the economy, expired with the end of 2012.

The so-called payroll tax is scheduled to bounce back up to 6.2pc this year from 4.2pc in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.

"It's a huge hit," says Joel Naroff, president of Naroff Economic Advisors. "It hits people whether they're making $10,000 or they're making $2 million. It doesn't matter who you are ... The lower your income, the more of your income you're (spending). So if you're taxes go up, it's going to come out of your spending."

That is bad news for an economy that is 70pc consumer spending.

The non-partisan Congressional Budget Office said the deal would add nearly $4 trillion over a decade to federal deficits, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels.

If Mr Obama and Congress failed to act, about $536bn in tax increases, touching nearly all American workers, and about $110bn in spending cuts, about 8pc of the annual budgets for most federal departments, were scheduled to start going into effect beginning in January.